I would replace the front and rear tranny seals. As for the engine, is it a fresh new rebuilt or just an engine you got out of a junk yard/ebay? If it is used, change as many gaskets as you can, especially the oil pan.
I am taking a guess you are sticking with the M10 four cylinder? If you wanna spend the money while its out, get bigger injectors, a header, and maybe even put a performance camshaft in. You could spend the money and buy a new camshaft, or just get a re-ground one for a lot cheaper.
The m10 does not offer to much in horsepower gains if you dont spend much money. If you wanna dump money into it, turbo charge it and get an aftermarket fuel injection system.
Did you get a 1.8 liter m10 or a 2.0 liter m10? I HIGHLEY recommend getting the 2.0 if you can. The one to use is the 1977-79 320i engine. Same block, just a different crankshaft and the pistons are flat tops. You could also port and polish the cylinder head... but the '78 2.0 engine i have, when I was checking out the ports in teh head I did not see to much you could work with. The heads allready have a good flow design and hardly any restrictions.
Again I recommend the 2.0 engine. It had 125 horsepower compared to the 1.8's 105 horsepower.
